VAT looks best

ByRichard L. StroutNovember 13, 1981

The United States is edging toward the value added tax (VAT) and I suspect we shall come to it. All Europe has it. It is the equivalent of a concealed national sales tax and it raises lots of money - tens of billions. Its merits are that it is pretty much self-enforcing, causes minimum discomfort and, as said, brings in billions. Its defects are that it is regressive, in other words hurts the poor more than the rich and widens the income gap.

The tax looks best when compared to its alternatives. Richard S. Schweiker, Secretary of Health and Human Services, for example, considers cuts in federal welfare and social distributions in order to meet the horrendous deficit that suddenly looms ahead. (A few months ago we were to have a deficit of $43.1 billion in fiscal year 1982 and a balanced budget in 1984. Now Senate Republican leaders fear the deficit in 1982 will be at least $80 billion, and the Office of Management and Budget guesses $100 billion.) Rather than cut social security to meet deficits like this Senate Republicans are edging toward VAT. It might be called something patriotic, ''National Defense Tax'' for instance. In any case it is worth looking at.

President Nixon in 1971 thought for a while of going to the value added tax. Again in 1978 Democratic tax writers Russell B. Long in the Senate and Rep. Al Ullman in the House revived the idea. Now it comes up again. Europe uses it; why doesn't America? On the theory that successful tax writing is to ''steal the largest amount of feathers with the smallest sqauwk,'' VAT is successful since its immediate effects are concealed. Imposts are levied on the increase in the value of goods at each stage of the production and distribution process. It is largely self-policing because each producer in the chain wants to make sure he is not being overcharged by the elements below him.

In estimating how much VAT he owes on the cotton he has sold the farmer deducts the VAT paid earlier on the fertilizer and other supplies. When the cotton gets to the mill the textile manufacturer deducts the earlier tax on the cotton and so on: the dress manufacturer deducts the tax on the cloth and the retailer the tax on the wholesaler. Finally, of course, the purchaser of the finished dress gets stuck with the accumulated VAT passed along to her in the price of the garment. Most states now have sales taxes: this would be the first national sales tax.

The ingenious system affects international commerce: countries that use VAT often do not require exporters to pay tax on the goods sold abroad; they get a tax credit for VAT already paid by suppliers. This special treatment for exports is commonly called a rebate and causes irritation to American exporters who get no such rebate in competition with foreign rivals.

Chief arguments against a European-style VAT in America now are that it is regressive, and that this is no time for experiments. The burden of VAT on the poor can be moderated to some degree by exempting food (or any number of other family expenditures). As to the timeliness argument the Reagan advisers are divided: some would forestall deficits by cutting more federal expenses (even including part of the scheduled arms budget); others would raise taxes. The situation is disturbing. Well-known economist Lester C. Thurow, writing in Newsweek, says that with ''unemployment sharply up, almost all storm signals now point to an economic typhoon.'' On the other hand Treasury Secretary Donald Regan thinks things will be better in the first quarter of next year and Murray Weidenbaum, chairman of the President's Council of Economic Advisers, says the economy will remain in recession for several months but will rally strongly as early as spring, helped by declining interest rates and stepped-up defense spending.

As to the value added tax, Senate majority leader Howard Baker (R) of Tennessee has recently come to the idea again and has discussed it with administration leaders. It's all preliminary and tentative. VAT seems to bob up when legislators are desperate for money and want something handy without the emotional penalties of cutting social welfare. Sen. Russell Long put it frankly three years ago: ''The value added tax is the least painful way of collecting money because it applies across the board and it reaches the consumer somewhat like a hidden sales tax.''